Wheat from the Chaff

How Wall Street Lobbied Itself Into A Crisis

In today's Globe and Mail (Dec. 31, 2009: B5), economics reporter Kevin Carmichael discusses a recent report from the IMF that draws a direct connection between Wall Street, political lobbying, and the current financial crisis. The IMF report has apparently caused quite a stir in the blogosphere and among the American political class. Here is the opening portion of Carmichael's article:

The case against Wall Street is getting stronger.

Since the financial crisis plunged the world economy into recession in the autumn of 2008, there has been a swirl of reports suggesting that financial firms used their clout in Washington to avoid tighter regulations in the years leading up to the meltdown. Most of those reports, however, have been anecdotal.

Now, in a landmark analysis, three economists at the International Monetary Fund have pulled together the public lobbying records of U.S. mortgage lenders and have drawn an empirical link between the money spent influencing politicians and firms' tendencies to engage in high-risk lending.

Their report, published this week as a "working paper" and therefore without the official stamp of the IMF, supports previous accounts in The Wall Street Journal and other publications that lenders such as Ameriquest Mortgage Co. and Countrywide Financial Corp. spent millions in the years ahead of the financial crisis to defeat legislation that would have curbed their ability to issue home loans to riskier borrowers.

Aside from documenting the persuasive power of Wall Street, the paper also highlights another challenge facing U.S. President Barack Obama and the various legislators leading the effort to diminish the risks facing the financial system. The findings suggest that some financial firms sought to profit by shaping the regulatory system to fit their business strategies or to position for a government bailout. To reduce that risk in the future, policy makers may need to weaken the financial industry's political influence - but it's not clear how that can be done. (The authors of the report declined to give specific solutions.)

"[O]ur analysis suggests that the political influence of the financial industry can be a source of systemic risk," Deniz Igan, Prachi Mishra and Thierry Tressel wrote in their conclusion....

According to the report, the most intensive lobbying came from the firms that ended up with the highest rate of financial "delinquencies".

.............

A few things come to mind after reading the newspaper article and the International Monetary Fund report.

My first thought is, "Is this actually news?" It appears that only economists and business reporters are surprised by the report's conclusions. Left-wing critics have been making similar critiques of the current financial crisis for many years. [For example, check out virtually every edition of The New York Review of Books for the last 4 years, or the critiques of David Harvey.] Indeed, the relationship between capitalism and the state has been an essential part of the socialist analysis of capitalism for 150 years. Nevertheless, it is interesting that such a direct rebuke of Wall Street and America's capitalist system has come from an organization that is emblematic of the American (and global) financial system. And, as the writers of the report add, "To the best of our knowledge, this is the first study to examine empirically the relationship between lobbying by financial institutions and mortgage lending in the run-up to the financial crisis."

A second point is that the current Wall Street example illustrates how corporate capitalism exists in large part because the government has provided a regulatory environment where short-term profits override responsible, long-term decision making. Government is, in this example, integral to capitalism. It is not the enemy of the market society. It is not minor player or a neutral night watchmen. It makes and implements policy which is absolutely essential for capitalism to pursue its interests, however short-sighted they turn out to be.

This example also sheds light on the Ralph Miliband-Nicos Poulantzas debate about the nature of the state in a capitalist society. Poulantzas, for whom I have great respect, argues that the state is the "unifying element" in capitalism. In this, he follows people like Karl Polanyi, who believes that the historical development of the modern market economy and the modern state were tightly and inevitably linked. But Poulantzas goes beyond this analysis, and explores the idea (building on Gramsci and Althusser) that while the state and capitalism are intertwined, the state nevertheless does (and must) have a certain degree of autonomy. The state must have this "relative autonomy" because, according to Poulantzas, the capitalist class is a fractious group that is dominated by short-term interests, and often pursues policies that are inimical to itself. If capitalism is to survive, it requires a state to save capitalism from itself.

Under Clinton and Bush, the corporate class almost succeeded in convincing the American government that short term profit was in everybody's interest. If the state was potentially autonomous, it did not utilize its potential. It will be interesting to see if the Obama administration wants to take a longer-term perspective and repair American capitalism, and, assuming it does, if it even can.